Critique gas prices inch up as oil prices rise

Written by Richard Lachlan

The rising prices of ethanol and crude oil raising gas prices to a point where consumers are buying less and less gas can't be explained by the supply and demand model as the companies selling gas have over looked something very big that was not touched upon in the previous entry. The suppliers of gas think that they have a hold on the industry and can raise prices higher and higher as they don't see any substitutes for gas right now as cars need gas to drive. However there are many different substitutes to driving. Public transit, walking, biking etc, can all be used instead of driving. And now that prices have gotten so high people are choosing alternative methods of transportation. If gas companies want to make any profit they are going to have to cut prices or they are going to lose large amounts of customers.

As mentioned in the original post demand is very low and supply is very high. The only way for a new equilibrium to be found is to cut prices down to a reasonable level. Gasoline may seem like a very inelastic commodity but there is a point where, the amount paid for gas is just to much for the average person and they need to find different methods of transportation. If prices do not get cut, gas may turn into a luxury good which is something I am sure suppliers and consumers do not want at all. The marginal utility of taking a bus, train etc, is on the way to surpassing driving a car due to these ridiculous gas prices.

The producers are soon going to realize all of this and a new equilibrium will be found as no company wants to go out of business. Firms do want to maximize profit and the only way for them to this now is to lower prices as a small amount of people purchasing expensive gas will not create as much profit as the majority of society purchasing gas at a reasonable price.

Gas prices will go down as companies will realize there are substitutes to driving a car. Gas companies need to take a hit in profits now so that they do not lose there consumers. Once more money is put into the gas industry more money will be available to purchase ethanol. Once producers of ethanol get more money they will be able to hire more workers produce ethanol at a cheaper price and the whole market will find a new equilibrium.